Inflation still stuck at 3%

By | Published: February 17, 2009

Ignore the RPI – it is just reflecting the huge cuts in interest rates. Although it is the rate that matters from the point of view of many contracts, for once we should examine Mr Brown’s chosen rate of the CPI.

It is obstinately still at 3%. The authorities should not be surprised. That is the price of falling sterling, which we will see reflected to some extent in rising prices, despite the general gloom and the discounting. For once CPI is giving a more meaningful impression of inflation than the RPI.

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25 Comments

It’s not easy ignoring RPI when my company pension increase payable in April is based on the December RPI (0.9% when I had been anticipating 3%+). I’m wishing it was based on CPI which I think more reflects older people’s inflation rate.

If the pound has found its new level, then I think there will be a one-off hit to the inflation figures, but they will relax back to low numbers afterward. By the time a year has gone by the annualised inflation figures will no longer contain any component from the fall in the pound.

Do you think, as I do, that a fall in the pound is good for our long-term future? In the medium and long-term it helps our high-tax high-cost economy have a hope of manufacturing goods for domestic and international markets at competitive prices. Our economy has lost too much manufacturing capacity; this trend needs to be reversed, and the sooner the better.

Kind regards

Reply: I think the devaluation has gone too far, with bad consequences for national wealth and inflation.

I thought it was quite the opposite: a. national wealth should increase as we export profitably to customers outside the country, thus earning money. b. inflation will indeed suffer an upward spike from higher import costs due to the weakened pound, but only this year. Next year there will be no similar inflation in cost of imports (unless of course the pound falls again), and so inflation should collapse to zero or below.

Have you expressed a view yet as to the inflationary effects of the quantitative easing that we keep hearing about in the news? This seems to me to be a problem in the making; if we have a lot of inflation from this source, I don’t know when and where we could expect to see it.

Kind regards

Reply: I have. I said there are inflationary dangers fron such a measure if it is undertaken in conjunction with high levels of state borrowing and spending and if it is not withdrawn early into the recovery.

Perhaps we should recall how GB swapped yardsticks to make him look smarter in controlling inflation.
Now, however, we and the pundits all seem confused about the meaning of comparative inflation figures.
So do pensioners whose annual increase is determined by one of the measures – we think it’s the one that was 5.3% late last year??

Can someone explain please and also the justification for excluding crucial expenses such as council tax and housing?

The daily telegraph’s cost of living survey “apparently” shows we have deflation – due to the lower cost of mortgages at present, when in reality we have inflation – just look at gold prices to see the flight from most currencies.

The lower interest rates just hide the signs of inflation – while at the same time increasing it.

Inflation is about the money supply. The erosion of the value of every pound in your pay packet or deposited in the bank by printing more money or increasing the Band of England balance sheet. It is what the government want to do as the only way to reduce the huge debt they have built up by debasing the value of the money that the debt is held in.

Do you think your wages will increase at the same rate as 25 % inflation?

…in other words we are now paying for Gordon Brown’s bonkers monetary policy over the last 11 years. The figures I have been able to find show a compound 10% per annum increase in money supply over GDP growth since 1997. That makes a pound now 35% of the size it was in 1997. It’s no wonder each one buys less. The real miracle is that any foreigner thinks it worth while holding Sterling at all. If I was selling to me I’d want to be paid in something more reliable.

Correct – At beginning of ’08 I switched out of Sterling into the Euro and made 30%, though with the Eurozone about to implode (because of Eastern EU, Ireland and Greece to name but a few), the Euro will come under pressure and I would switch into SFR or Yen, though USD surprisingly looks a good bet especially against GBP – 1.20-1.25 here we come! UK is a basket case, Mike Offord’s piece ‘Bankrupt Britain’ is a fair appraisal! But please take this as a view and not investment advice!

I’d like to say I feel as though it’s 3% but the monthly income on my savings tells me otherwise as that has depreciated by 4% alone before I start measuring increases to outgoings.

This government lives in cuckoo land.

Also, I wonder why we’re in a global economy but not in a ‘globally agreed benefit’ which is commensurate with the cost of living?

Today I’ve gotten figures from America, Holland, Greece, Romania and France, and Britain is still in the middle ages by comparison yet we’re supposed to be one of the richest countries on earth.

Why is it, that politicians are so dead set to beat down the unemployed here and tell them to find work in Europe when unemployment rates in Europe are higher than here?

Also, where has our money gone into these banks, what have they done with it, who got it, and why, and can we get those figures discussed please once someone bothers to ask the government where it spent our money and why it bashes British workers, unlike Obama who is lifting his further up the scale.

Why is it, that politicians are so dead set to beat down the unemployed here and tell them to find work in Europe when unemployment rates in Europe are higher than here?

When you look at economically inactive work-age adults that is not the case! We need to find a matrix whicjh compares apples with apples – we have a much level of people on incapacity benefit and so called training schemes than many EU nations!

The ultimate measure of inflation is the GDP Deflater the Treasury and the ONS calculate; and I don’t believe that either.

Redwoodians, have a look at the following. I suspect the UK uses the same tricks as the US does. If I am wrong, perhaps an employee of the Treasury or the ONS will correct me; have the balls to tell us the truth on this web-site.

The RPI is heavily weighted to mortgage payments. Since we read that many mortgage payers are not benefiting from lower interest rates just how is the figure calculated? Food prices are not coming down, petrol has recently gone up again and energy prices have not yet come down and are not coming down anywhere near as much as they went up in 2008. Water charges continue to rise and who expects council tax to stay level or reduce? Exchange rates have dropped dramatically increasing the prices of all our imports. The signs are that, contrary to media reports, prices are not coming down nor look likely to do. Why then is there much talk in the media about deflation and the dangers it poses? Inflation is now said to be better than deflation. I have long feared that we shall suffer from rampant inflation boosted by the government as their only way to reduce the massive debts they have amassed. They care nothing for the victims of this policy as it will not affect them. They will comfortably continue to charge as much as they can to their tax-free expenses and look forward to their inflation proofed over generous pensions.

Yes I gathered. It just shows that the government cannot boast low unemployment and half a million vacancies whilst in the same breath saying “find a job in Europe” and when published European figures are HIGHER for unemployment than the government give for the UK.

They want their cake cut both ways and with an argument either way but they fail to appreciate that British people aren’t daft enough to see they aren’t cutting any of that cake for them because Labour has already scoffed it.

Inflation measures are a myth in my experience with the real rate higher than published. Even in Japan you are told inflation is 0% but thats not what I experience in the shops and the Yen has appreciated so goods should be cheaper!!!!

The whole deflation argument is to soften up the people for the printing of money in order to inflate away the debt. No doubt some dodgy statistics will be used to hide it until the last possible moment by which time it will be too late.

For those who think devaluing the currency is a good thing I recommend looking at the growth statistics from the 70’s and 80’s when we last “devalued”. The only way forward is to get back to sound monetary policy (thats money supply growth and not inflation) and supply side policies. Otherwise the next growth cycle will be demand driven with no supply resulting in inflation…..

There has been much talk of deflation for some time now. If this is taken to mean prices generally falling (i.e., so a negative CPI) then I don’t think this will actually happen. I personally feel that CPI will go down further – to say 2%, maybe 1.5% – but it wont sink into negative numbers.

More likely is a resurgence of inflation in the next year. As the BoE (and the Fed in States) starts to increase the money supply (thru Quantitative Easing) so eventually the mood in the economy will change: there will be so much money in the economy that people will want to get rid of it, exchanging it for “hard” assets – gold, silver – for fear of the inflationary conseqences of King’s and Brown’s/Mandy’s fool hardiness. The money created out of thin air to date has stayed in bank’s reserves as they build up their asset ratios. They will reach a point when they will start to lend this out. And so the inflationary spiral will begin. Ofcourse the monetary authorities could employ effective counter expansionary action. But they have singularly failed to do this in the last 12 years so what makes anyone think they will be better at it this time around?

And there will be no improvement in unemployment as inflation takes off again either. The belief that higher inflation inevitably leads to lower levels of unemployment is mistaken. Even with unemployment approaching 2 and then 3 million there will not be a universal unemployent of all of the factors of production (including labour) that industries will need to expand. Bottleknecks will be rife.

My friend on Facebook shared this link and I’m not dissapointed at all that I came to your blog.

About John Redwood

John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.